The Stealth Tax

What is one of the fastest growing “taxes” on corporations that isn’t even called a tax?

Need another hint. This “tax” is different in every state, but the once common factor is that every state says it is making corporations pay it so the state can get the money to its rightful owners.

Still stumped?

The “tax” I am talking about is the abandoned or unclaimed property (AUP) laws.

All 50 states have such laws. The theory is that the state will hold the property until it is claimed by its rightful owner. But since the state doesn’t look very hard for that person, what usually ends up happening is the money sits in the state coffers and can be used for other things. Generally AUP is due to the state of last known residence of the rightful owner, but if that state is unknown, then often the state of incorporation for the corporation with the property takes claim on the property.

Delaware, because of its beneficial corporate law structure is the state of incorporation for many companies. Last year Delaware brought in $566.5 million to its state coffers – the third largest source of revenue for the state. And with such a large amount of money at stake, Delaware is becoming one of the most aggressive pursuers of AUP. The state, like many others, hires independent contractors to “audit” companies. The contractors get paid a percentage of the AUP they find. Of course you know how that works. If you only get paid if you find something, more often than not, you are going to find something.

The rise of gift cards has also heightened states’ interest in AUPs. All of those unused gift card balances are AUPs, often with no known owner – fresh meat for a ravenous state searching for revenue. New Jersey went has far as to require companies to turn over the entire amount of unused gift card balances more than 2 years old. Fortunately, the court found that New Jersey’s actions were unlawful. The problem is that the full gift card amount did not take into account the profit the company expected to earn when the gift card was used. The court said taking the entire balance was not only taking unclaimed property, but also was the taking of property that was rightfully the company’s.

Of course, I don’t think the saga will end there. I could see a new law coming about which requires a company to show the average profit they get and then leave that portion with the company and take the rest. It would seem such a law would meet the requirements the court set out.

They say there are only two things certain in life – death and taxes. Maybe that saying needs to be amended to three things – death, taxes and AUP.